Is Now The Time To Bet On Casino Stocks?

 |  Includes: LVS, MGM, MPEL, WYNN
by: Bill Maurer

Casino stocks were hammered Thursday after a price cut of MGM sparked continued fears of slowdown in China. An analyst at Citi cut his price target from $13.50 to $11.20, based on reduced value for MGM China Holdings, which MGM owns 51% of. This sparked fears of a China slowdown which would have negative impacts for the entire sector, sending these stocks lower throughout the day. Even after this selloff, is now the right time to step in?

Current Price $9.93 $41.38 $125.54 $9.01
52-week high $16.94 $55.47 $172.58 $15.15
52-week low $9.01 $34.12 $85.72 $5.04
Market Cap. $4.85B $30.12B $15.56B $4.81B
3-month change -23.26% -0.70% -10.19% -28.89%
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Sands (NYSE:LVS) has held up quite well over the past 3 months, while the others have all seen double digit declines. Interestingly enough, Sands is worth double that of Wynn (NASDAQ:WYNN), approximately, while MGM and Melco (NASDAQ:MPEL) share the same market cap (wait till you see the revenue numbers a little later). As it is the largest, I would tend to favor Sands here because I don't think you will see as much volatility in the name.

Revs (2010) $6.02B $6.85B $4.18B $2.64B
Revs (2011 est.) $7.47B $9.18B $5.33B $3.62B
Revs (2012 est.) $8.90B $10.93B $5.90B $4.04B
EPS (2010) ($1.07) $0.98 $2.11 ($0.02)
EPS (2011 est.) ($0.50) $1.90 $5.55 $0.37
EPS (2012 est.) ($0.33) $2.47 $6.38 $0.57
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As you can see from the table, Las Vegas Sands offers the best potential revenue growth for this year and next. All of these companies show impressive revenue growth going forward. However, these numbers are very dependent on that China slowdown that's been talked about. Obviously, Melco Crown Entertainment, which is based in Hong Kong, would have the biggest exposure to this market and would see the most downside pressure. Based on this chart, I would like Sands best with Wynn Resorts second. I'd like to see some profitability out of Melco before I make a recommendation on them, and MGM still has some work left to do.

P/E (2011 est. EPS) N/A 21.78 22.62 24.35
P/E (2012 est. EPS) N/A 16.75 19.68 15.81
Price/Sales (ttm) 0.79 3.80 3.45 1.62
Price/Book (mrq) 0.79 4.38 6.70 2.03
PEG (5-year) -0.55 0.60 0.38 0.43
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On a P/E basis, Sands trades as the cheapest, but is the worst in the other three metrics. MGM would appear to be the cheapest, but as you will see, is not expected to be profitable just quite yet. I like Melco's numbers here, but you have to remember that they are focused only in Asia, while the others have other operations around the world (primarily in the US).

Margins (ttm) MGM* LVS WYNN MPEL
Gross Margin 37.65% 47.02% 71.77% 66.57%
Operating Margin 7.28% 23.75% 18.13% 7.88%
Net Margin -9.57% 14.80% 7.73% 3.24%
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*MGM's net margin is an estimate arrived at after taking out a $3.5 billion gain the company reported last quarter on holding in MGM China. After taking out this gain, the number should be within a few basis points either way of the actual number.

I still like Sands here. Although I'd like to see a little gross margin improvement, they have the best operating and net margins, so they are showing the ability to translate that good revenue growth to the bottom line. Again, Wynn is my number two followed by Melco. Melco and MGM do need to improve those margins a bit before I'd consider them a worthy investment based on these numbers.

Financials (mrq) MGM LVS WYNN MPEL
Current Ratio 1.13 1.72 1.79 2.81
Debt Ratio 76.61% 63.44% 64.71% 52.93%
Working Capital $208M $1.98B $913M $848M
Cash $922M $3.65B $1.68B $1.03B
Short Term Debt None $1.47B $151M None
Long Term Debt $12.6B $8.99B $3.00B $2.32B
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Since Sands is the largest by market cap, it would make sense that they have the most cash and a fair amount of debt. Remember, they are worth $30 billion, with Wynn at $15 billion and the other two around $5 billion. MGM has a huge amount of long term debt, which will need to be corrected sooner rather than later. Last quarter they paid $270 million in interest expenses, which equaled about 15% of the quarter's revenues. Overall I like Wynn and Melco here. Wynn has the best cash to debt ratio, with a strong current ratio. Melco's financials look solid, but you can't always believe everything you see out of the companies in that region. If those numbers are comparable in a year, I'll start believing.

These stocks took a tumble, down anywhere from 3.3% to 9.3%. Fears out of China ruled the day. I wouldn't be surprised if we saw some more short term pain before things got better. You may even want to wait until after the next round of earnings comes out before jumping in. However, I like these names, especially Sands, and they should provide some good growth in the years ahead, assuming that China does not fall off a cliff.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.